Encouraging Commodity Demand Expectations for Second Half
July 17, 2023
Read Time 2 MIN
Macro Outlook: China’s Poor Economic Trends Continue to Affect Commodities
The UBS Constant Maturity Commodity Index (CMCI) underperformed the Bloomberg Commodity Index (BCOM) in the second quarter (Q2) by 0.5% but continues to outperform year-to-date by over 3.5%. Year-to-date outperformance is mostly due to CMCI’s lower exposure to natural gas which declined sharply in the first half of 2023. CMCI also outperformed BCOM in the agricultural sector due to owning both London and U.S. cocoa. BCOM does not own cocoa, which is up about 35% year-to-date.
CMCI’s underperformance in the second quarter was partly due to BCOM’s better roll yield capture in the energy and agricultural sectors. Front-month exposure helped BCOM in Q2 but over the longer term, it has hurt BCOM’s performance relative to CMCI. Additionally, CMCI has a higher exposure to the industrial metals sector which declined by about 10% in Q2 due to very disappointing economic news from China. The declines in all commodity indexes during Q2 2023 was mostly due to the poor economic trends in China. We anticipate changes in the second half of 2023, however, as China takes stronger monetary and fiscal policy actions to reignite its economy. More than any other economy, China’s is a command economy driven by policy. The second half of 2023 could be positive for most commodities after a down first half-year. U.S. interest rates will likely peak as the U.S. Federal Reserve completes this tightening cycle which we believe, could trigger new declines in the U.S. dollar. Combined with some stronger policy-driven Chinese growth, commodity demand expectations could improve.
Sector Review: Industrial Metals Slump; Live Cattle Price Rally Led Significant Livestock Jump
The energy sector declined about 2% in the quarter. BCOM benefited from a larger natural gas exposure and front-month exposure in both natural gas and unleaded gas.
The agricultural sector was mostly unchanged in Q2 but wheat and corn fell sharply and cocoa rallied by about 20%. Soybeans were close to unchanged but soy meal was down 6% while bean oil was up about 10%.
Industrial metals fell sharply in Q2. China’s weaker-than-expected economic performance dampened demand expectations for industrial metals. China is the largest buyer of industrial metals by a wide margin, representing more than 40% of global consumption for several metals. Aluminum, zinc, nickel and copper all fell in Q2.
The precious metals sector fell slightly in Q2; Gold declined 2.4% and silver dropped 5.0%.
The livestock sector was up for Q2 led by a 10% rally in live cattle prices. Live cattle prices continue to trade near all-time highs of $180.
Roll Yield Estimates YTD - June 2023
Source: Bloomberg. Data as of June 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.
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Roll yield is the amount of return generated in the futures market after an investor rolls a short-term contract into a longer-term contract and profits from the convergence of the futures price toward a higher spot or cash price (Investopedia).
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